Flexible Prices and Leverage

53 Pages Posted: 24 Nov 2015 Last revised: 4 Feb 2017

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Ryan Liu

BlackRock

Carolin E. Pflueger

University of Chicago - Harris Public Policy; National Bureau of Economic Research (NBER)

Michael Weber

University of Chicago - Finance

Multiple version iconThere are 4 versions of this paper

Date Written: May 2016

Abstract

The frequency with which firms adjust output prices is an important determinant of persistent differences in capital structure across firms. The most flexible-price firms have a 19% higher long-term financial leverage ratio than the most sticky-price firms, controlling for known determinants of capital structure. We rationalize this novel fact in a costly-state-verification model, in which sticky-price firms are more exposed to shocks, and face tighter financial constraints. In the model, a better monitoring ability reduces asymmetric information and narrows the leverage gap between inflexible- and flexible-price firms. Consistently, sticky-price firms increased leverage more than flexible-price firms following the staggered implementation of the Interstate Banking and Branching Efficiency Act across states and over time, which we use in a triple-differences identification strategy. Firms' frequency of price adjustment did not change around the deregulation.

Keywords: Capital Structure, Nominal Rigidities, Bank Deregulation, Industrial Organization and Finance, Price Setting, Bankruptcy

JEL Classification: E12, E44, G28, G32, G33

Suggested Citation

D'Acunto, Francesco and Liu, Ryan and Pflueger, Carolin E. and Weber, Michael, Flexible Prices and Leverage (May 2016). Robert H. Smith School Research Paper No. RHS 2692893. Available at SSRN: https://ssrn.com/abstract=2692893 or http://dx.doi.org/10.2139/ssrn.2692893

Francesco D'Acunto

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Ryan Liu

BlackRock ( email )

55 East 52nd Street
New York City, NY 10055
United States

Carolin E. Pflueger

University of Chicago - Harris Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Weber (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
158
Abstract Views
976
rank
101,543
PlumX Metrics